Greek concerns grow over debt write-down

Greek stocks have slumped, led by the banks on mounting concerns they could be sunk if the EU makes private creditors take a 50 per cent loss on their holdings of government bonds.

The Athens stock exchange lost 4.51 per cent on Monday as leading banks tumbled more than 20 per cent after EU leaders on Sunday proposed a massive Greek debt restructuring as part of efforts to contain the euro zone debt crisis.

EU leaders held a series of meetings over the weekend in Brussels and will meet again on Wednesday to agree on a comprehensive accord - although many are sceptical they will do that after so many failed attempts.

"If decisions are again like previous ones, filled with asterisks, then the ground we are building on will be unstable," said Culture Minister Pavlos Geroulanos, a close associate of Prime Minister George Papandreou.

"While markets are wagering against Europe's success, Europe responds with slow and ambiguous steps. This is no way to solve the problem," he told state radio NET.

An earlier EU plan in July only called for a 21 per cent cut in Greek debt held by private creditors, who were to exchange maturing Greek government bonds with longer-term instruments.

A 50 per cent writedown would mean that the country's main four banks - National Bank, Eurobank, Alpha and Piraeus Bank - would need a recapitalisation of 8.9 billion euros ($12 billion) to maintain a core capital ratio of nine per cent, analysts at Natixis bank said in a note.

The four leading lenders have already written off 3.2 billion euros to reflect the impact of a 21 per cent debt reduction.

Speaking after the summit late on Sunday, Prime Minister Papandreou pleaded for a "viable" write-off for his country's debt - meaning that whatever is decided should not come at the expense of the Greek banking system.

If the Greek banks fail, it is hard to see where the Greek economy will get the credit needed to halt and then reverse a deepening recession.

"There is a willingness to face this challenge in order to get a viable solution," Papandreou said after summit talks in Brussels.

He said Greece needed a "viable solution to the Greek debt - especially on the participation by private Greek banks", pension funds and insurance firms.

The Greek leader told EU partners during the summit that the "immediate debt reduction" Athens would secure from a 50 per cent writedown would be only 57.1 billion euros.

A close adviser of Papandreou, former European Central Bank deputy head Lucas Papademos, had earlier warned that a 50 per cent write-off would in effect amount only to a 20 per cent cut to Greece's debt mountain of over 350 billion euros.

Papademos noted that Greek banks, pension funds and insurance companies in July held nearly 30 per cent of central government debt - and losses there would have to be offset by the cash-strapped Greek state.

Another 30 per cent held by the International Monetary Fund, European Central Bank and other official institutions could not be restructured for "political and legal reasons", Papademos said.